anks: On quarterly basis, we estimate bank’s profitability to jump by a massive 39%QoQ in 4QCY14 to PKR 0.94bn or PKR 0.90/share (PKR 1.36/share 9MCY14). Our estimate is based upon; a) normalized operating expenses in 4QCY14, and b) investment in PIBs. This should bring CY14E EPS to PKR 2.26 against PKR 1.77 (+27%YoY) last year.

We understand the bank has a history of paying bonus – in the past 3 years the bank has paid a 12.5% bonus each year and that in 3Q. However, in CY14 we see limited room for the bank to announce bonus and/or also cash dividend – given low capital base (CAR: CY13 11.29%).

Normalising admin cost ahead: Bank’s 9MCY14 earnings were negatively affected due to a one-off admin expense in lieu of outgoing CEO severance pay during 1QCY14 (amount PKR ~400mn) and Voluntary Separation Scheme (VSS) given to employees in 2QCY14 (amount PKR ~450mn). Thankfully, much of this is over now, and we may expect normalized admin expenses for the bank starting 4QCY14. As a result, cost-to-income should rest within a close bracket of ~67% in CY14E and CY15F.

Asset quality: accreting NPLs a concern: Hefty investments in PIB (PKR 54bn by Sep-14 vs. PKR 19bn in Dec-13) should start to produce results in terms of BV expansion, once realized, since yield curve has shifted downward post policy rate cut in Nov-14. But, that also means earnings yields would now be at the helm of bank’s loan sheet profile, which at the moment stands below par. So far, the bank has reduced its loan sheet by ~PKR 7bn (a 3% decline since Dec-13). Much of this can be ascribed to accreting NPLs worth ~PKR 1.9bn during 9MCY14, pushing its infection ratio to 14.9% by Sep-14, from 13.5% in Dec-13.

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